Edited version of private advice

Authorisation Number: 1051798047721

Date of advice: 19 January 2021

Ruling

Subject: Legal expenses

Question

Are the legal expenses you incurred regarding your Workers Compensation claim deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The Commissioner accepts that the full amount of the legal expenses you incurred meets the requirements set out in per Taxation Ruling TR 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997?

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You sustained an injury at work.

You lodged a worker's compensation claim for compensation in relation to the injury.

The claim was accepted by your employer and you began receiving weekly compensation payments from your employer in accordance with the Workers Rehabilitation and Compensation Act 1988 (Tas) (the Act).

On XXXX your employer lodged a request to reduce your weekly payments with the Workers Rehabilitation and Compensation Tribunal (the Tribunal) in accordance with section 88 of the Act.

On the XXXX your employer ceased your weekly compensation payments in accordance with section 86(1)(c) of the Act.

In accordance with section 86(4) of the Act you lodged a dispute to the termination of your weekly payments with the Tribunal.

On the XXXX your employer proposed to resolve your dispute by was of a Deed of Settlement and Release (the deed) and you were advised that that you must seek legal or financial advice about the implications of accepting the deed.

The proposed deed stated:

a.    The State will:

i.      pay the Employee's reasonable legal costs of and incidental to obtaining approval of settlement from the Tribunal pursuant to s. 132A of the Act.....

You engaged legal representation.

You incurred legal expenses.

The final deed was accepted by you on the XXXX.

The final deed states:

a.    The State will:

i.      pay $ XXXX inclusive of legal cost and disbursement to the Employee; and

You have received the payment of $XXXX for the reimbursement of your legal expenses as detailed in the final deed.

You were not terminated.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 20-20

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including:

Reimbursement of legal expenses

Subsection 20-20(2) of the ITAA 1997 provides that an amount you receive as a recoupment of a loss or outgoing is an assessable recoupment if:

•         you receive the amount by way of insurance or indemnity, and

•         you can deduct an amount for the loss or outgoing for the year in which the reimbursed legal costs were received, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.

If an amount is recouped by way of settlement of a claim for legal costs, it will be an assessable recoupment under subsection 20-20(2) of the ITAA 1997 where the purpose of the settlement is to indemnify the recipient for professional legal costs actually incurred in the conduct of the litigation, where the legal costs were deductible.

As discussed above, you are entitled to claim a deduction for the legal expenses associated with this action.

As the legal expenses are deductible, any reimbursement of your legal expenses is considered to be an assessable recoupment and is included in your assessable income in the financial year in which it is received.

You may apply for another ruling on these or any other matters.